The Real Costs of ‘Buy American’

Feb 06, 2009

You could say it’s been a good week for steel. The Pittsburgh Steelers won the Super Bowl. A guy named Michael Steele became the chairman of the Republican Party. And U.S. steel producers are giddy about the economic stimulus bill winding its way through Washington.

Steelers fans and Republicans are entitled to whatever joy they feel about these recent events. All of us, however, will pay a high price for Big Steel’s special-interest muscle.

A provision in the economic stimulus bill would require government contractors to purchase steel and iron from domestic producers. Another would demand the Transportation Security Administration buy uniforms made from American textiles.

I understand the emotional appeal of requirements to “Buy American.” They certainly sound patriotic. The members of Congress who sponsor them may even believe they’re acting patriotically. Everyone wants American workers to prosper, after all.

Yet this policy is fundamentally misguided. It would raise the cost of infrastructure projects that are already very expensive --and that means fewer of them actually will get done. At a time when Americans are struggling economically, our public officials shouldn’t squander taxpayer dollars for the sake of feel-good rhetoric. Instead, they should try to make the most of what they’ve been given.

These so-called “Buy American” provisions pose a major test for President Obama in the early days of his administration. Does he understand that the free flow of goods and services across borders promotes economic prosperity? Or does he think that our country can somehow defy the lesson of the 1930s, when the protectionist Smoot-Hawley Tariff Act transformed a bad recession into the Great Depression?

Recent signs are positive. On Tuesday, President Obama voiced some doubts about the “Buy American” scam: “I agree that we can’t send a protectionist message, “he said. “I think it would be a mistake….at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.” Obama may want to copy the vice president on his next trade-policy memo. Last week Joe Biden made it sound as if “Buy American” isolationism is just fine. “I don’t view that as some of the pure free-traders view it, as a harbinger of protectionism,” he said. “I don’t buy that at all.”

Biden may not have noticed the irony of his words: “I don’t buy that at all” is precisely the problem. Telling contractors that they can’t purchase material from Big Steel’s rivals limits competition, which leads to wasteful spending.

When California renovated a bridge over the San Francisco Bay in the 1990s, it had to comply with a state rule that required the use of domestic steel unless it was 25 percent more expensive than foreign steel. So guess what? Domestic steel producers charged 23 percent more than imported steel. Douglas Irwin of Dartmouth recently described the unfortunate result: “While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.”

It turns out that “Buy American” doesn’t help very many Americans. Instead, it’s a handout to a special-interest group with lobbying clout. Everybody else loses, including American workers whose projects don’t receive funding and American drivers who can’t cross new and improved bridges.

This debate is about far more than what’s in the economic stimulus bill, of course. Protectionism has a way of spreading like a bad virus. As soon as we start building barriers to what other nations can sell here, they’ll start building barriers to what we can sell there. This is precisely what happened in the 1930s, when a struggling global economy came to a grinding halt.

Farmers appreciate the importance of international trade because about one-third of what we grow is sold to foreign consumers--people who already choose to “Buy American” because of the quality of what we produce. The last thing we need is to lose a share of the overseas markets that we’ve earned because Washington wants to pay off a completely different industry.

But that’s what could happen--if Japan imposes a “Buy Japanese” law and Canada institutes a “Buy Canadian” law, all because politicians in Washington sparked a new and unnecessary trade war.

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Matt @ Economic Sense2/7/2009 05:25 PM

I can't answer for the author, but his reference to the Smoot Hawley Act should be sufficient. There was a great piece in the Wall Street Journal in November Entitled: 5 Myths about the Great Depression. Myth # 2:
The stock market crash in October 1929 precipitated the Great Depression.
"What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy -- beginning with the disastrous retreat into protectionism marked by the passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell, Smoot-Hawley doubled the effective tariff duties on a wide range of manufactures and agricultural products. It triggered the beggar-thy-neighbor policies of countervailing tariffs that caused the international economy to collapse. Some have argued that the increasing likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the stock-market collapse in the fall of 1929."

Martin Long2/7/2009 04:55 PM

I seem to have read a different history of the great depression than you related. Maybe you could inform me to your source that was used for the "protectionism"?

Kent Wagoner2/6/2009 10:49 AM

At the risk of sounding un-patriotic, I'm inclined to agree. With our nation's multi-trillion dollar trade deficit, multi-trillion dollar federal budget, and the nearly one trillion dollar "porkulus" bill about to be passed, we can't afford to be protectionist to the point of risking what exports we DO have. While agriculture accounts for only a small dollar percentage of our total exports, it is significant enough to warrant some degree of care.